Ford Beating General Motors in Race to Europe Turnaround
When Ford Motor Co. (F) posts fourth- quarter results tomorrow, the numbers probably won’t look great, likely the lowest operating profit of the year. Those figures mask the optimism coming from an unlikely place: Europe.
Using its turnaround in the U.S. as a road map, Ford is moving more briskly to recover in Europe than its competitors. While Ford will report a loss of more than $1.5 billion for the full year in Europe and has forecast a similar result for 2013, Chief Financial Officer Bob Shanks said in an interview this month during the Detroit auto show, those losses will begin to disappear in about two years.
Ford will be about a year ahead of General Motors Co. (GM) in efforts to revamp operations in the region, said Peter Nesvold, a Jefferies Group Inc. analyst with a buy rating on the shares. Ford’s board signaled increased conviction in the company’s European restructuring plan by doubling the quarterly dividend earlier this month, he said.
“In the case of Ford, ultimately, this is the team that without external help was able to accomplish in North America what almost nobody thought was going to be possible,” Nesvold, who is based in New York, said in a telephone interview. “The problems aren’t identical in Europe, but they are similar.”
Ford’s fourth-quarter revenue probably slipped 4.5 percent to $33 billion, the average of 11 estimates compiled by Bloomberg, from $34.6 billion a year earlier. The average of 19 estimates is for 25 cents of operating profit per share, up from 20 cents a year earlier.
Optimism about Ford’s prospects in Europe helped its shares rise this month to their highest level since May 2011. Analysts are divided about where it goes from here. Buckingham Research Group, Barclays Plc and Deutsche Bank AG have downgraded the stock within the past week. At the same time, at least seven analysts have raised their price target for the shares this year, according to data compiled by Bloomberg.
The “disconnect between frothy expectations and likely performance makes us unwilling to chase Ford,” Brian Johnson, a Chicago-based analyst for Barclays, wrote in a Jan. 25 report. Ford’s rise since Oct. 24, the day before the mid-decade forecast, through today more than quintupled the S&P 500’s 6.5 percent gain during that span. “Investor hopes are getting ahead of solid reality. While maintaining a positive outlook for Ford’s business performance, we are cautious on the shares.”
Ford closed at $13.78, 10 cents higher than on Jan. 25 in New York. The company’s first-quarter dividend is payable March 1 to shareholders of record on Jan. 30.
Ford has said it wants to achieve profit margins of 8 percent to 10 percent in North America over the long term. The North American profits are underwriting the European restructuring.
“What investors are looking for is getting comfortable with the sustainability of those margins and figuring out exactly how much higher they could go,” Joseph Spak, an analyst with RBC Capital Markets, who rates Ford the equivalent of a buy, said in a telephone interview.
Demand in Europe fell 7.8 percent last year to 12.5 million vehicle registrations, the lowest in 19 years, the European Automobile Manufacturers’ Association, or ACEA, said this month. Ford’s registrations plunged 13 percent to 939,409, according to the Brussels-based trade group.
The story is quite the opposite in North America. Record profits there buttressed Ford’s bottom line in the first nine months of last year. The automaker earned $6.47 billion before taxes in the region in 2012’s first nine months, more than it made there for all of 2011. North America had an operating profit margin of 11.2 percent during the period in an industry where a 5 percent margin is respectable.
“We’ve had a wonderful nine months, in terms of profitability, margin and generating very positive operating cash flow,” said CFO Shanks. “I think the path that we’ve been on will continue.”
Chief Executive Officer Alan Mulally, 67, revived Ford after arriving in 2006 from Boeing Co. (BA) by using $23.4 billion that the company borrowed late that year to overhaul its lineup with fuel-efficient models such as the Focus and Fiesta. Those efforts were preceded by plans to restructure the company’s North American operations beginning in October 2005, Shanks said.
“If we had not started then, if we had waited until the overall economic crisis was evident, we would not have been ready for it,” he said. “That’s another interesting learning on Europe -- there was no evidence from the outside when people looked at what we were doing that we were making any progress.”
Ford plans to shutter three factories in Europe by the end of next year and cut 6,200 jobs, or 13 percent of its workforce there, in an effort to break even in the region by mid-decade. The Dearborn, Michigan-based automaker’s shares climbed 35 percent from Oct. 24, the day before Mulally presented the company’s restructuring plan for Europe, through Jan. 25.
Ford plans to introduce its Mustang sports car in Europe soon and is tripling its sport-utility vehicle offerings in the continent, Mulally said in September. The automaker is adding the subcompact EcoSport SUV, just four meters (13 feet, 1 inch) long, and the Edge midsized utility to its European lineup, which already includes the Kuga compact, known in the U.S. as the Escape.
“They basically turn over their entire product lineup over the next 12 to 18 months,” Nesvold said of Ford’s vehicle offerings in the region. “That gives them an opportunity to improve their pricing in Europe, and then in 2014 and 2015 they will have addressed their cost and capacity issues.”
Ford restarted production at its factory in Genk, Belgium, last week after a blockade by workers over plans to shut the site ended. The company hadn’t shipped a vehicle from the plant since it said the factory will shut for good in 2014. A factory in Southampton, England, that makes chassis cabs for the Transit van and a stamping plant in Dagenham, on the outskirts of London, will close this year.
“We think we can be profitable, with the restructuring actions that we’ve taken and all the new products that we’re introducing, by mid-decade,” Mulally said this month in a speech at the Automotive News World Congress event in Detroit. “When you look at some of the people that are not taking action, it might be a little bit longer.”
GM told workers at its German unit Opel last week that it may shutter a factory in that country as soon as the end of 2014. The Detroit-based automaker has racked up $17.3 billion in losses in Europe since 1999 and has said it plans to break even there by mid-decade.
GM’s plans haven’t been quite as well received by investors as Ford’s. Since Oct. 30, the day before GM said it would cut costs by $500 million a year starting this year, it gained 24 percent through today. While that’s far better than the S&P’s 6.2 percent gain, it trails Ford’s 33 percent rise.
“We are not focused on what Ford is doing, but are keenly focused on driving to break-even by the middle of the decade with great products and an improved cost structure,” said Randy Arickx, a GM spokesman.
Fiat SpA (F), the majority owner of Chrysler Group LLC, is relying on the U.S. unit to offset losses at Fiat’s mass-market brands in Europe. Sergio Marchionne, CEO of both companies, is working to improve results in the region before merging the two automakers by 2015.
Ford likes its odds in Europe, given its experience in North America.
“Even with a no-change bottom line in Europe in ’13 versus ’12, we’re well on our way in terms of a transformation that will get that part of the business back on track,” Ford’s Shanks said. “We didn’t fix North America in six months. It took years. The same thing will happen in Europe.”
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